Anti-Fraud Drive Proves Costly for Employees
A decade-old campaign against workers’ compensation fraud in California is part of a much broader national effort to save money for employers and insurers at the expense of workers, according to legal scholars and researchers who specialize in the field.
The effort to shift costs from employers and insurers to workers took shape in the late 1980s, and gathered steam in the early 1990s when the nation’s economy was staggering from a recession. It took different forms in different states, but it almost always included an anti-fraud element around which popular and legislative support coalesced for other, more technical changes that often had far greater impacts.
“It was a crisis, and the insurers needed ways to persuade the legislatures to restrict their costs,” said Edward Welch, director of the Workers’ Compensation Center at Michigan State University. “Fraud was one of the images they used to justify narrowing eligibility, changing the way you measure benefits and basically saving money for employers at the expense of injured workers.”
Spokesmen for insurance associations deny any conspiracy.
But the overall result has been a boon for business and a burden for workers. Insurers and employers have cut costs while workers have lost benefits.
Today, many observers believe that prosecutions and workplace practices have left some workers scared to file legitimate claims. Many of those who do file get less than they once would have: Benefits in some cases have shrunken, eroded either by inflation or direct cutbacks. Some injuries are no longer covered at all.
With the exception of Southern California, where peculiar circumstances created a significant fraud problem centered on medical-legal mills in the late 1980s and early 1990s, no evidence has surfaced suggesting that workers lie very often about their on-the-job injuries.
“Most thoughtful people who do a lot of research in workers’ comp would come to the conclusion that there is not a lot of fraud in the system,” said Rand Corp. economist Robert Reville. “By making a claim that there was a lot of fraud, I think they [insurance carriers] were benefiting at workers’ expense [and] discouraging workers from filing claims.”
Since the Alliance of American Insurers announced that it was making workers’ compensation insurance fraud a legislative priority in 1989, more than two-thirds of the states, including California, enacted laws that made insurance fraud a felony. California and many other states also launched formal anti-fraud enforcement efforts. Very little fraud--involving far less than 1% of all cases--has been proven.
Meanwhile, other legislative changes engineered by employers and insurers have stretched the fundamental bargain behind America’s system of compensating injured workers. That bargain was forged nearly a century ago, when workers gave up the chance to sue employers in court for huge sums for on-the-job injuries. In return, workers got the certain ability to collect modest sums regardless of who was at fault.
Over the last decade, employers and insurance carriers have saved billions of dollars as legislatures in many states rolled back benefits, more narrowly defined workplace injuries and introduced impediments to collecting for them.
Employer costs declined by more than one-third as a percentage of payroll and by $8.5 billion in constant dollars, according to the nonprofit, nonpartisan National Academy of Social Insurance.
Insurers went from losing eight cents on each dollar of premium to making 15 or 20 cents, said John F. Burton Jr., dean of the Rutgers University School of Management and Labor Relations.
Labor “got handed our shorts,” said Jim Ellenberger, assistant director of occupational safety and health for the national AFL-CIO.
Major Changes in the Law
Among the key changes, according to workers’ compensation economists and legal scholars, were that:
* Some states reduced payments for the partial but permanent disabilities that account for the majority of workers’ compensation benefits. Connecticut slashed these benefits--which are intended to compensate for current and future lost earnings--by 27%. Florida cut in half the length of time an injured worker is eligible to receive them.
Texas employed a much more conservative standard for calculating them. And California let inflation do the work. For about half of injured workers, those with relatively minor permanent disabilities, benefits were held constant in the face of rising costs. The effect: Benefits dropped 40% in value since 1984.
* Other states such as Oregon, the Dakotas and Nevada changed standards of proof for workplace injuries. They required that workers show that their injuries were mainly work-related, not mainly the result of preexisting health conditions.
That was a big change, particularly for older workers who were more likely to have chronic, underlying conditions aggravated by work. Under the new standard, an Oregon court found that a worker who had occupationally caused lung disease was not eligible for benefits because his preexisting breathing problem left him susceptible to the disease.
* Other states reduced or eliminated compensation for certain types of hard-to-validate injuries. Virginia, Montana and Louisiana tightened rules on compensating workers for the fastest-growing type of ailment, involving musculoskeletal problems from repetitive stresses of activities like scanning prices on grocery checkout lines and typing all day at computer keyboards.
Kentucky, Florida, Oklahoma, Wyoming and West Virginia barred mental stress claims arising from work unless the stress arose from a physical injury at work.
California required an employee to prove that work, rather than some other aspect of life, was the predominant cause of the stress, and it outlawed payments for any stress case in which the employer didn’t intend to cause harm.
The changes amounted to a major retrenchment, reversing decades of rising benefits and expanding coverage, and profoundly altering the understanding of how society would come to the aid of workers who were hurt on the job.
State legislatures enacted the changes after a period of rising costs in the 1970s and 1980s. Despite the rising costs, many insurers were still able to make handsome profits. They passed on increased costs to their employer clients and enjoyed large profits from investing in high-yield bonds.
But as those investment opportunities disappeared in a period of low inflation, the industry declared itself in a crisis. When recession hit, employers joined them.
In state after state, employers warned legislatures that they would have to pull up stakes and leave if no solutions to skyrocketing premiums were found.
“This whipsawing between states” fed “the benefits-cutting frenzy,” said Timothy Morse, a workers’ compensation researcher at the University of Connecticut.
As benefits were cut, reported on-the-job injuries plummeted.
The big question, even today, is: Why?
There are a number of possibilities. Some point to the healthy economy. Claims tend to fall off in good economic times, economists say, when workers apparently would rather keep working, even if it hurts, than lose money collecting workers’ compensation. Others cite safer workplaces or the anti-fraud campaign itself.
Fear of Filing Insurance Claims
Since fraud, by its nature, involves deceit, no one knows how much of it there is or was. But that hasn’t stopped people from speculating. At the height of anti-fraud fever in California, then-Gov. Pete Wilson came in at the high end, asserting without proof that 30% of all claims were bogus.
“We cringe when we hear the industry say 30% of workers’ comp claims are fraudulent,” said Dennis Jay, director of the national Coalition Against Insurance Fraud. “But is it 10%? Eight percent? Five percent?”
Jay said he did not know.
Assuming that even the highest estimates are correct, recent academic studies strongly suggest that American workers are more likely to be stoics than cheats.
In a nationwide survey of 26,000 households containing 70,000 people conducted in 1989, Rand found that one-quarter of the households contained people who had been injured on the job.
But only half of those with workplace injuries that required doctor or even hospital care filed workers’ compensation claims. Even among those who reported missing more than seven days of work, fewer than half said they filed claims.
More recently, studies in Michigan, Connecticut and Maryland have found that only one out of four workers being treated for work-related musculoskeletal problems filed claims.
Many said they did not file because they did not think their injuries were serious enough or because they could get coverage through group health insurance.
But 20% of the workers in the Michigan study who did not file also cited fears that they would be fired, or denied promotions, or thought ill of by their colleagues or bosses.
The insurance industry says it is sure that the anti-fraud campaign has worked. Economists working for the industry did a study concluding that without the campaign, costs would be nearly 20% higher.
But, if that is correct, is that a good thing? Have only fraudulent claimants been driven from the system?
The anti-fraud campaign has also grafted a kind of social stigma onto the filing of a claim, said Boston University professor Leslie Boden.
Recipients of workers’ compensation are now widely viewed as malingerers or cheats, said Boden, not as hard workers who have been injured yet will receive meager benefits.
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California has the 42nd-lowest temporary total disability benefits of the 50 states. Most states replace 100% of the average weekly wage. California replaces 72%.
Average weekly wage in California
$684 per week
Maximum benefits in California
$490 per week
Permanent partial disability benefits do not fully compensate for the loss of income caused by an injury. A study comparing long-term experience of co-workers found that incomes of those who were injured suffered even when benefits were taken into account.
Injured worker’s earnings in 5 years: $130,000
Uninjured worker’s earnings in 5 years: $169,000
Source: Rand, AFL-CIO, California Division of Workers’ Compensation
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Profits and Losses
Workers’ compensation insurers’ profits have fluctuated wildly. The industry got a boost in the 1990s when benefits were cut.
Workers’ Compensation Insurers’ Overall Profit Nationwide
Note: Unlike the rest of the insurance industry, California insurers had profit margins that were artificially
propped up until 1995, when government price-setting was eliminated. A period of cutthroat competition
ensued in which insurers slashed rates in bids to keep customers and subsequently have lost money. *
Source: John Burton, professor at Rutgers University School of Management and Labor Relations
Employers’ Premiums Nationwide*
* Costs in 1982-84 dollars
Source: National Academy of Social Insurance